Paper Offers Guidance for Evaluating TDF Glide Paths

According to the authors of “Evaluation of Target-Date Glide
Paths Within Defined Contribution Plans,” generally the investment objectives
for those plans are to accumulate wealth before retirement and to convert that
wealth to income once retirement begins.

The conversion to income presents its own set of issues,
said the authors of the paper, Richard K. Fullmer of T. Rowe Price and James A.
Tzitzouris of the T. Rowe Price Group. “Income generation depends on the
intended horizon, and sponsors face two primary considerations related to this
horizon. The first is the ability of a glide path to generate lifetime income consistently
over the course of retirement. The second is the ability of the glide path to
limit the risk of capital loss near and during retirement, which is
particularly important for participants who withdraw their balances over a more
moderate-term horizon.”

Fullmer and Tzitzouris found that higher-equity glide paths
are superior at providing a retirement income stream that can enable participants to
maintain their standard of living throughout their post-retirement lifetime.

The authors also found that a lower-equity glide path may
provide a better choice for “those concerned about the ability to recover the
full amount of the peak account balance in the early stages of retirement and
who may be willing to trade some lifetime income potential for this increased
stability.” The benefits of this approach, compared with a higher-equity glide
path, depends on the plan sponsor and participant preferences, said Fullmer and Tzitzouris.

The trade-offs depend on characteristics unique to each
plan, such as participant salary levels and contribution rates, and length of their retirement
horizons, added the authors.